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\author{131 Undergraduate Public Economics \\ Emmanuel Saez \\ UC Berkeley}
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\title{Unemployment Insurance, Disability Insurance, and Workers' Compensation} \onlyslides{1-300}
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%{\bf OUTLINE}
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%Chapter 14
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%14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers' Compensation
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%14.2 Unemployment Insurance
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%14.3 Disability Insurance
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%14.4 Workers' Compensation
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%14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers' Compensation
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{\bf INSTITUTIONAL FEATURES}
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Unemployment insurance, workers' compensation, and disability insurance are three social insurance programs in the United States, and they share many common features.
{\bf Unemployment insurance (UI)}:
A federally mandated, state-run program in which payroll taxes are used to pay benefits to unemployed workers laid off by companies.
{\bf Disability insurance (DI):} A federal program in which a portion
of the Social Security payroll tax is used to pay benefits to
workers who have suffered a medical impairment that leaves
them permanently unable to work.
{\bf Workers' compensation (WC):} State-mandated insurance, which
firms generally buy from private insurers, that pays for medical
costs and lost wages associated with an on-the-job injury.
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% use Raj chetty UI lecture
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{\bf Unemployment Insurance}
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Unemployment insurance is a major social insurance program in the U.S.
Substantial size: \$50 bn/year in normal times (\$150bn/year during Great Recession)
Macroeconomic importance in stabilization/stimulus
Like other social programs, triggered by an event
In this case, involuntary job loss
Controversial debate about unemployment benefits
Benefit: helps people in a time of need
Cost: reduces incentive to search for work while unemployed
What is the optimal design of UI system given this tradeoff?
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{\bf Institutional Features of Unemployment Insurance}
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UI is a federally mandated, state-run program
Although UI is federally-mandated, each state sets its own parameters on the program.
This creates a great deal of variation across states
Useful as a ``laboratory'' for empirical work
$\Rightarrow$ UI is a heavily studied program
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{\bf Financing of UI Benefits}
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1) UI is financed through a payroll tax on employers:
$\Rightarrow$ an employee will not see a deduction for UI on his or her paycheck.
This payroll tax averages 1-2\% of earnings
2) UI is partially experience-rated on firms
$\Rightarrow$ the tax that finances the UI program rises as firms have more layoffs, but not on a one-for-one basis
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{\bf Eligibility Requirements and Benefits}
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1) Individuals must have earned a minimum amount over the previous year.
2) Unemployment spell must be a result of a layoff, rather than from quitting or getting fired for cause
(easy to check)
3) Individual must be actively seeking work and willing to accept a job comparable to the one lost
(hard to check)
These eligibility requirements mean that not all of the unemployed actually collect benefits.
Even among eligible, 50\% do not takeup the UI benefit
(Lack of information about eligibility, stigma from collecting a government handout, or transaction costs)
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{\bf UI Benefits}
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UI benefits are a function of previous earnings
These benefits vary by state.
The replacement rate is the amount of previous earnings that is replaced by the UI system.
$R = B/W$
Replacement rates vary from 35\% to 55\% of earnings
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\includepdf[pages={2}]{UIDIWC_ch14_new_attach.pdf}
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{\bf UI Benefits Duration}
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In general, one can collect UI for 6 months.
In recessions, benefits are automatically extended to 9 months or 12 months
In deep recessions, benefits can be further extended (23 months in
2008-13)
Duration of UI benefits typically much higher in European countries
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\includepdf[pages={3}]{UIDIWC_ch14_new_attach.pdf}
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{\bf Analysis of Optimal Unemployment Insurance}
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Which system is the best?
First need to define what we mean by ``best''--what is the objective function?
Typical objective considered by economists: maximize agent's welfare
In this case, because there is uncertainty, welfare is given by expected utility
Use a formal mathematical model to tackle the problem and get a number for the optimal benefit
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{\bf Expected Utility Model}
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Individual's expected utility:
\[ EU = (1-p) u(c_e) + p u(c_u) = (1-p)u(w-t) + p u(b) \]
$p$: probability of being unemployed
$c_e$ = consumption when employed,
$c_u$ = consumption when unemployed
$w$ = wage when working
$t$ = tax used to finance program,
$b$ = UI benefit
Government needs to balance budget (taxes fund benefits):
\[(1-p) \cdot t = p \cdot b \quad \Rightarrow \quad t= (p/(1-p)) \cdot b \]
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{\bf Optimal UI with no moral hazard}
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No moral hazard means that $p$ is not affected by UI
Plugging in govt. budget constraint, rewrite individual's expected utility as:
\[ EU = (1-p)u(w-(p/(1-p))b) + p u(b) \]
Government's problem: find $b$ that maximizes $EU$.
Optimal benefit $b^*$ will be $b$ such that: $c_u=c_e$
This is \textbf{full insurance} (as we saw earlier in class)
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{\bf Optimal UI with moral hazard}
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With moral hazard, $p$ increases with $b$ as more generous benefits
deter job search and hence increase unemployment
Government now chooses $b$ to maximize $EU$ but taking into account
that $p$ is a function of $b$ in the budget constraint
\[ EU = (1-p)u(w-[p(b)/(1-p(b))]b) + p u(b) \]
Get new formula:
\[ \frac{u'(c_u)-u'(c_e)}{u'(c_e)} = \frac{1}{1-p} \varepsilon_{p,b} \text{ with }
\varepsilon_{p,b} = \frac{b}{p} \cdot \frac{dp}{db}\]
$\varepsilon_{p,b}>0$ is the elasticity of unemployment rate with respect to benefits (captures
size of moral hazard effects)
Now $0